Investors, do you know what your money is funding?
In an era of growing social conflict and outright animosity in our own country and between governments and cultures worldwide, investors face some tough choices regarding issues of the day such as gender and racial equality, economic and ecological sustainability, and corporate ethics and governance, among others.
Thankfully, socially conscious investors – those who invest in companies that seek to do good for humanity — are now in the majority. So, I ask: Do you have any idea what your money is funding? Is social equity and ethical investing important to you? Is President Trump about to redefine America’s values?
As defined by wiki, “Socially Responsible Investing” is one of several related concepts and approaches that influence and, in some cases govern, how investors and asset managers invest portfolios. Generally stated, those investors who do care could seek to avoid harm to the world by screening out companies and industries which have a negative impact on global society and our environment and to search for investments that contribute in a positive way.
In April 2004, while in retirement after a career as builder and manager of broker-dealers, I decided to use my experience to start up an online community discussion of capital markets and social equity. I knew that few readers had even heard the term ‘social equity’. Some, I guess, were thinking I must be a socialist seeking equality. In fact, I was not an activist but simply a person with conservative principles and business interests highlighted by a populist ideology quite unlike the all-for-me values of many of my associates in the business.
As my career in global financial markets advanced to doing business at higher levels, I realized that my personal values were truly the exception, not the rule, when it came to fair dealings. For many years, my belief system, based on doing good deeds for all people while favoring none had been deep-rooted. So, for years I had set out to help change the rules. I joined an Ontario government task force to clean up capital market problems. I made people-centric presentations at formal hearings of the Canadian Securities Administrators and the Senate of Canada Banking Committee and I even joined a disclosures committee of the US Securities and Exchange Commission. As the internet developed, I saw an outlet to inspire others around the world to do the same, so I started this blog.
I am pleased to say that today, thanks to social media and the power of the Internet, people have a much better understanding of the meaning of social equity and why it’s important to strive for it.
Defined by Businessdictionary.com, Social Equity is a bedrock of society: “Fairness and impartiality towards all concerned, based on the principles of even-handed dealing. (The term) implies giving as much advantage, consideration, or latitude to one party as it is given to another. Along with economy, effectiveness, and efficiency, (Social Equity) is essential for ensuring that extent and costs of funds, goods and services are fairly divided among their recipients.”
As noted by Wiki: “In 1996 the United States President’s Council on Sustainable Development defined social equity as “equal opportunity, in a safe and healthy environment. Social equity is the least defined and least understood element of the triad that is sustainable development yet is integral in creating sustainability – balancing economic, environmental and social equity.”
Today the industry involved in socially responsible investing (SRI) practices is huge, measured in the trillions of dollars of Assets Under Management. As principled investors, portfolio managers must consider both financial return, as required by fiduciary duty, and social good to bring about positive social change. Companies that are making progress in environmental friendliness, social responsibility and corporate governance (ESG) are sought out for investment while those that fail to meet certain ethical practice standards are avoided.
On Friday, while watching the Inauguration of President Trump, I perceived a new set of obstacles that will soon play out for SRI-focused portfolio managers and investors. Of greatest concern to me is the President’s ‘me-first’ approach to leadership, which I can see him promoting under the America-First banner.
I want readers to carefully consider if America’s largest corporations – say those in the Dow 30 — are even American. Are they not global holding companies with worldwide manufacturing and sales operations, which are financed and traded internationally? Is General Motors any different than Mercedes Benz or JP Morgan different than HSBC, for example? Aren’t they all in business seeking to maximize profit for the shareholders regardless of national residence of those shareholders?
I did a study of the percentage of revenue earned by Dow 30 companies outside the United States. Are you aware that at least 50% of their sales is what Americans refer to as ‘foreign’?
As an example of the ethical issue I speak of, let’s use Trump’s choice for Secretary of State, Rex Tillerson. As Chairman and CEO of Exxon Mobil (NYSE:XOM), until this month, Mr. Tillerson managed a global workforce of over 75,000, about the same as he is now commanding at State. But as the new international agent of the Trumpian ‘America-First’ policy, Tillerson is going to have to carry the President’s message into countries where the majority of Exxon Mobil’s sales occurred, where many thousands of his former employees are resident.
The Exxon Mobil financial summaries show that the company’s sales were about 10% in UK, 6% Belgium, 6% Italy, 5% Singapore, 4% Germany, 10% in Canada, and so on. In fact, 61.1% of total 2015 Exxon Mobil sales and operations were outside the United States, making that company, like 26 of the Dow 30 mega-corporations, truly an international holding company.
Going down the list of Dow 30 companies, here is the approximate total percentage of non-US sales:
Note that for the Dow 30, the average non-US revenue as a percentage of total revenue is about 46%, but if the USA-4 (Home Depot, Travelers, UnitedHealth and Verizon) are removed, the average of the other 26 goes to 52%. When I added Alphabet, Facebook, Carnival Cruise and General Motors, which are America’s largest company, as well as the 3rd largest tech company and the largest hospitality and auto manufacturing companies, the average of non-US revenue of these 30 so-called US companies, with a combined market capitalization of almost 6 trillion, is still at 51%. Intel Corp has fully 80% of total revenues coming from overseas, while McDonalds and Apple come in at 67% and 65% respectively. So, are these US companies or American holding companies with the majority of their investment value derived abroad.
As noted at the outset, the bigger question concerns the social values of these companies. Are they American-First, as demanded by the President, or are they global institutions?
Years ago, I had a close working relationship with the CEO of all securities trading and investment management of HSBC for North America. While sitting in his office one day, he asked if I thought HSBC was a Hong Kong or UK company? The conversation led to his view that his employer was a global bank that operated in over 100 countries where their business practices were radically different in many of them because of their domestic laws and culture. The bottom line, he said, was that “What my colleague in (unnamed country) can do, must in fact do, I could not possibly consider here.”
I ask the serious question whether, in terms of issues like women in leadership, employee relations, gay and lesbian rights, contaminated land and hazardous waste management, and on and on, are the business practices of these so-called US companies outside the United States the same as they are in the United States? In fact, and this is my point, I don’t think it’s possible for global corporations to put one country’s politics ahead of their overall business interests.
Today, I must ask the incoming President where he intends to draw the line in terms of America-First. The answer to that is important because when Mr. Tillerson ventures abroad for important meetings, the doors will be either half-open or half-shut.
In the same vein, now that Trump has exacerbated the polarity issues, SRI-focused US-based investors and portfolio managers will also have to consider whose values are to be considered when investing overseas. Will they be assuming the application of America-First criteria or pondering what’s best for our world and what’s practical and must be done?
Remember; it’s a small world, getting smaller. If protectionism is America’s intended new State of the Union, I think we all have a lot of thinking to do on this topic.
The global capital markets is not a TV reality show and the players are not apprentices. So, when the incoming President decides to tell some of the global players “You’re fired!” he ought to understand that just 30 of the companies that he calls American have together more than 5,000 times the assets and 20,000 times the employees of the Trump organization, and over 50% of their value is from abroad. And, that’s just the tip of it.
In closing I wish to announce, as part of my new working agreement with Owen Williams, a SRI portfolio strategy named the WMA Cara Social Equity Portfolio. Our portfolio universe is composed of 100 small to mid-cap exchange-traded companies that we believe exhibit very positive environmental, social and governance characteristics, worldwide. The portfolio invests systematically in up to 20 of the most attractive stocks based on WMA Rotation Model daily signals. When changes are made, this portfolio is rebalanced to maintain an equal weighting. No position may exceed 5%. The portfolio will hold cash only in the event of the model not returning a buy/hold signal on at least 20 component stocks.
As social equity has always been an important issue for me, I shall continue writing extensively about the key issues.
Enjoy your weekend.
/Bill
